page 74, #29: NinMount paid 320 for a 50% interest in Boswell First of all, is there a difference between ROE and return on beginning equity? – Return on beginning equity is the same under: A) either the consolidations, but different under the equity method B) the equity method, consolidation with full goodwill, and consolidation with partial goodwill C) none of the equity method, consolidation with full goodwill, nor partial goodwill. The answer is A either of the consolidations (control or proportionate control)…meaning they both include the 320 non controlling interest (purchase price), and therefore the return on beginning equity is the same for either of the consolidations, but the return on beginning equity is different than the equity method. AND equity under the equity method is just the parent’s equity Ok, I understand that… BUT, now I am looking at Schweser book 6 sample exam Exam 3, morning session, #46 Fisher owns 50% of Hydro, it doesn’t say how much Fisher paid for Hydro #46 asks: What is the difference between ROE under the equity method and proportionate consolidation…(only in theory, they don’t actually provide any data) net income is the same for both equity is the same for both therefore ROE is the same for both… But, according to the CFA textbook in the first question, the equity is DIFFERENT because in the first example, under the joint venture prop. consolidation, equity included the purchase price, but in the second (Schweser example) equity is the same! It’s not that hard, but I’m confused!
Proportionate consolidation does not include non controlling interest. You are taking the proportionate amount of assets and liabilities, so no minority interest is recorded. Generally speaking, equity under proportionate consolidation and the equity method will be the same, but not under consolidation.
Remember that Schweser has a mistake on the equity method in its books - in the text they say that under the equity method equity would be the same under equity method or consolidation, which is not true.
thanks guys
Just confirming, though: shareholder’s equity is the same under control method proportionate control because they both include the purchase price (non controlling interest) is that correct?
from memory i’m not sure if this is correct. I had THOUGHT that proportinate / equity method would yield the same equity (its just that equity method is NET assets and proportionate gives you the pieces, but they end up the same) and consolidation method would give higher equity than the other two because of the non-controlling interest being recorded in shareholders equity (as opposed to mezzanine where it use to be). Am i wrong?
mark, that is exactly what I am trying to find out
markCFAIL Wrote: ------------------------------------------------------- > from memory i’m not sure if this is correct. I > had THOUGHT that proportinate / equity method > would yield the same equity (its just that equity > method is NET assets and proportionate gives you > the pieces, but they end up the same) and > consolidation method would give higher equity than > the other two because of the non-controlling > interest being recorded in shareholders equity (as > opposed to mezzanine where it use to be). > > Am i wrong? You are 100% correct according to CFA texts and Schweser errata.
proportionate consolidation and equity method should get you the same ending equity number - there is no minority interest number. Acquisition method would get you a higher S/E amount b/c you include minority interest as a component of S/E.
…No, the question was comparing consolidation with full goodwill and partial goodwill. And rightly both will have the same beginning equity. With Equity method, no outside interest is reported. hence a lower Beginning Equity will translate to a higher ROE with Equity method over the other methods. The question is not to compare Proportional Consolidation with Acquisition Method.